Your Midyear Tax Checkup, Day 4: Revisit Retirement Contributions

With 2010 halfway complete, we’ve spent all this week providing you with tax planning tips to keep in mind for the six months ahead — the kind of advice CPAs across the country are considering for their own clients right now. These moves require some foresight and time, which is why it’s important to start thinking about them now (vs. on December 31). But they’re worth the effort in terms of savings and/or stress reduction.

We’ve discussed how to do an estimated tax analysis, which write-offs you should be thinking about, and how to make use of investment losses.

One thing we haven’t yet talked about is the good ole’ nest egg.

Rob Seltzer, a Beverly Hills, Calif. CPA and financial adviser, notes that midyear is a good time to reconsider how much you’re contributing to your retirement accounts — and not just because saving for retirement is good for your future, but also because it’s good for your present tax situation.

By setting aside money in a 401(k), you’re deferring the income, which means it is not considered taxable for the current year. And reducing your taxable income reduces the amount you’ll have to pay tax on. If you’re eligible to deduct contributions to a traditional IRA — for couples filing jointly who are covered by a retirement plan at work, this starts phasing out starting at incomes of $89,000 — saving in that vehicle is another way to take an edge off today’s income.

Bottom line: If you’re not currently maxing out these accounts, consider upping your contributions. For 2010, you can stash up to $16,500 in a 401(k), plus another $5,000 $5,500 if you’re 50 or older. You can put away up to $5,000 in an IRA, or $6,000 if you’re 50 or above. For a married couple in California with an income of $100,000, increasing 401(k) contributions from $10,000 a year to $15,000 shaves $1,500 off their tax bill, says Seltzer. It may take 15 minutes on the phone with HR to arrange an increase, but that’s a pretty sweet return on investment.

Anyway, that’s it for what the pros say you should be thinking about right now regarding taxes; but if there’s something specific on your mind that we haven’t discussed this week, go ahead and ask it in the comments, and we will try to put it to our experts. Now we return you to your regularly scheduled summer vacation…


Reality Sinks in for 401(k) Investors — and Providers

It’s taken a few years, but Americans are finally giving up on the dream of an early retirement. A new poll by the Gallup organization found that for the first time more Americans say they will work longer than age 65, rather than call it quits in their 50s or early 60s.

The change is dramatic. More than a third of those surveyed said they would retire after 65, compared with just 12% in 1995, which was the first year Gallup began asking that question. Some 29% still intend to retire before age 65, but that percentage has dwindled from a high of 50% in 1996. Another 27% said they would retire at age 65.

Clearly, the financial setbacks from the market crash and recession are forcing Americans to realize they need to work longer.

Also playing a role: the higher age limit for claiming full Social Security benefits — at least 66 for those born between 1943 and 1954, rising to 67 for those born in 1960 or later. Still, as another Gallup poll found, more Americans are counting on Social Security as their main source of income than before — some 34% vs. 27% in 2007.

Given the modest level of income that Social Security provides, however, the majority of workers continue to rely on their employer plans for retirement security. Some 45% of those surveyed expect their 401(k) plan or IRAs to be their biggest source of income when they call it a career — but that’s down from 52% in 2007.

As critics have long pointed out, 401(k) plans, whose returns depend largely on the whims of the stock market, need major reforms to make them effective for retirement savings. That’s something even 401(k) providers are beginning to acknowledge. A newly released study by Wells Fargo found that employers have been slow to take full responsibility in helping their workers achieve a financial secure retirement.

Only 45% of employers surveyed by Wells Fargo said that the “primary” goal of offering a retirement plan is to “provide employees with the means to achieve a financially sound retirement.” Instead, the majority (51%) say the main reason for offering the plan is “provide competitive benefits to attract and retain employees.”

When asked about “the greatest challenge and concern” facing their plans, only 19% of employers answered “providing employees with the financial ability to retire.” By contrast, some 26% cited market volatility’s effect on account balances.

The people at Wells Fargo see retirement as a shared responsibility between individuals, employers and the government. And they think that all parties can do more to ensure its success.

“Many employers don’t see it as their responsibility to make sure their workers are on track to a secure retirement,” said Laurie Nordquist, director of Wells Fargo Institutional Retirement and Trust, in a recent interview. “And many also are concerned about legal gray areas in what they can offer in terms of advice and guidance.”

Nordquist, along with fellow Wells Fargo director Joe Ready, say that Washington could make a few key reforms that would motivate employers to improve their plans. Among them: offering clear rules permitting advice in 401(k) plans (proposals for permitting advice have been bottled up in Washington), encouraging guaranteed income options at retirement, and providing a tax break for employers on matching contributions.

Are you planning to retire later than age 65? And what changes in your 401(k) might help you retire sooner? Let us know in the comments section below.

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Money Makeover: Fix Our Mix

Robert And Sharon Nelson have no trouble saving. They’re setting aside nearly 14% of their income for retirement and have amassed more than $250,000 overall. And since Robert is an instructor at Penn State, the couple’s 4-year-old daughter, Olivia, is nearly set for college — the school will pay 75% of her tuition if she attends.

But Robert, 40, and Sharon, 37, a sales commission manager, want to retire once Olivia is out of school, and they’re not sure if they’re on track.

For one thing, the Nelsons don’t know whether their money is in the right mix of investments.

“It seems like we’re doing stuff, but I don’t know if it’s the right stuff,” Robert says.

Adding to their challenge: The Nelsons have four 401(k)s and one 403(b) plan at various employers, making it hard to keep track of their overall allocations. Robert has a great state pension that will make it easier to retire early, but he knows they’ll need to change their investing plan to make up the rest.

The solution

1. Cut back on cash.

The Nelsons have $80,000 in emergency cash. That’s 20% too much, says adviser Lee Pelko of Lancaster, Pa. Plus, only $15,000 of their rainy-day fund needs to sit in savings and money-market accounts. The rest can go into higher-yielding options like laddered CDs and short-term bond funds.

2. Boost equities.

A 50% stake in stocks won’t let them retire early. Pelko suggests raising it to at least 60% and investing in small-cap and foreign stock funds. Though Robert has the security of a pension, that’s as aggressive as he wants to be.

3. Consolidate old 401(k)s.

By rolling over old accounts into one IRA, they can simplify while increasing their investment options.



More Money Friday Roundup: Hospitals vs. Insurers & Bankers vs. New Regulator

Personal finance from around the Web:

  • Members of the American Bankers Association join the legions of lobbyists on Capitol Hill hoping to influence new financial regulations. Bankers are against the creation of a consumer financial protection regulator and want to remain exempt from state consumer laws. [The Washington Post]
  • Once you’ve said, “I do,” it’s time to split up the personal finance chores. Here are some tips for newlyweds on how to get your financial house in order. [Morningstar]

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More Money Friday Roundup: L.A. vs. The Banks & a la Carte Cable

Personal finance from around the Web:

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More Money Monday Roundup: Bull Market 2.0 & Tequila at Home

Personal finance from around the Web:

  • To circumvent competing with unbeatable deals on the Internet, many brands are removing the price tags from listings on e-commerce sites. Consumers must put items in their “shopping cart” and proceed to the virtual checkout before they know their total. [The New York Times]
  • S&P 500 slump got you down? It’s just the second stage of a bull market, says one commentator. Look to auto and house sales instead as the benchmarks for recovery. [Bloomberg]

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